UPDATE: A number of readers said Fare Guard was essentially insurance. We asked David Shim for a comment and he replied:

“We don’t think of Fare Guard as insurance, rather we think of it along the lines of a mortgage rate lock. Fare Guard gives travelers the piece of mind that they have an additional 7 days to finalize their travel plans without having to worry about price increases. This is similar to a mortgage rate lock in that consumers have time to shop for their home, with the comfort that if interest rates do increase, they are guaranteed lower locked rate.”

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If I’m understanding correctly, you’re buying insurance for the lowest price — not locking in a price for a given flight. So, if you are looking to go to say, the Kentucky Derby, and you protect today’s price for a week; then come back to the site when your travel plans firm, you could find that the price was guarenteed, but the only flight at the old price is now at 5am.

FYI — the site is only letting you use Fare Guard when the system predicts that the price is liking to fall or stay the same. I can’t lock in a price to Louisville for Derby weekend, for example. Chit.

The system is stupid because you are not protecting your specific travel plans.

For instance, I am looking to fly from JFK to Vegas from 2/23-2/26. I want to fly non-stop, which is being quoted at $288 but right now there are flights with connections being quoted at $279.

The only option being given to me is to protect the $279 price, not the $288 on the flight I want.

Farecast has a great service/site and I’ve been wondering how they are going to make money since they don’t collect any booking fees. Now I know how, by getting suckers to put $10 down insuring situations that will never come to fruition.

If they allowed you to insurance your specific parameters (morning/afternoon/evening departure, non-stop vs. multiple legs, etc.) then this would be a truly great offering. But then again, they’d be losing their shirtsâ€¦.

Not to piss in anyone’s Wheaties, but this service will probably be the source of agony for many tipsters.

As coreynyc has pointed out you are only hedged against the changes on the lowest fare on specific travel dates, not on price changes for your specific itinerary. The problem here is that your itinerary could change materially in price while the lowest fare stays put. You’re not hedging your actual risk, but the risk that the lowest offered fare changes. The effectiveness of this strategy is heavily dependent on the correlation between price changes in your specific itinerary and the change of the lowest fare.

I’d have no idea how to fair value this and I don’t expect your typical consumer to either. The fact that they price it flat without consideration for volatility in the reference asset leads me to believe that Farecast has no idea how to properly price the risk either. I think they are taking the approach that the lowest fare available is unlikely to change much over a week period and that the premium they charge has enough fudge factor to cover any eventuality.

It’s a neat idea, but it doesn’t really solve a lot of people’s problems, which they will find out when the flight they thought they locked in goes up $150 and the lowest available fare stays the same.

Also the analogy between a mortgage rate lock is busted. The rate lock is a swap tied to a specific contract (the mortgage the bank is extending me) This is an option on the lowest price from a basket of different contracts.

It would be like saying we’ll subtract the difference beetween the lowest rate we originate today and the lowest rate we originate a week from now from your mortgage rate. Except I think I would be better able to price that.